Over the last 20 years, the road has gotten tougher for boutique contract manufacturing organizations (CMO) and niche manufacturers. Once accepted as not only a viable, but at times, critically important alternative to large contract manufacturers, ongoing supply chain issues, increasing pricing pressures, and just plain old convenience have driven medical product outsourcing specialists away from cultivating diversity in their supply chains. What remains is a small pool of very large CMOs with a wide-ranging list of capabilities that are dominating the contract manufacturing market. Price and convenience are two pretty good arguments in favor of this situation, but in this article, I will address the risks associated with the current state of the industry and what we, as manufacturers, have become completely desensitized and blind to by having supply chains with limited options.
I write this as I’m currently traveling to Anaheim, Calif., for the and conference. Thinking back to many conversations had at the same show in 2024, one of the main topics with outsourcing specialists was their apparent distress over having “too many critical components that are single-sourced” within their purview.
I get it; it is about risk. Yet, it seems that “price and convenience” may have upset the ability to maintain a proper balance, to some degree. Large or small, CMO vendors are subjected to serious “hoop-jumping” to earn the right to do business in the medtech world. Questions are posed that delve deeply into our history and stability, financial soundness, supply chain management systems, and recovery planning after a force majeure to uncover more than surface-level details. They are designed to peer beyond the window dressing of a website or a lunch & learn, revealing the true strength of a potential vendor.
All these questions point to mitigating risk and supply chain stability. Then, I hear the words “too many critical components are single-sourced.” That is when I start to ask questions because this seems counterintuitive to me.
If one of the main tenets of a supply chain manager is to integrate all aspects of a supply chain to ensure value is provided to clients and shareholders alike, it seems a myopic view of only certain portions of the supply chain could compromise its overall effectiveness and performance.
I think we are reaching this point.
A laser focus on pricing continues to drive the decision-making of many in the industry. It is undoubtedly important—”no margin, no mission,” right?! But understanding the origin of this price sensitivity sheds light on the depth of this issue’s roots.
Consider that it is not our friendly supply chain manager or director of outsourcing making the rules—it is Wall Street. The unending and unrelenting need to post quarter-over-quarter gains to prove shareholder value and garner more investment is driving this focus. In fact, I think many of the medical product outsourcing specialists are probably feeling like they are in a no-win situation. They recognize the risk in the mandates they’re given, but with the landscape of the CMO space drastically changing in the last 20 years, how are they supposed to turn it into a win?
They might contact established large competitors to their current incumbent CMO and get a polite “no thank you” when asking for a proposal for 10% to 20% of the volume. The incumbent is, after all, doing a fine job. They have made substantial investments to support increasing volumes, and, because of the promised volume, they have provided pricing that is in line with the project targets. The sourcing specialist can look to move a small percentage of the work to mitigate the business continuity risk that exists by having one supplier, but not much more than that. The other potential vendors—at least the ones that the specialist thinks are viable because they are on his available AVL (which is an entirely different conversation that needs to be surfaced)—are in exactly the same boat as the incumbent CMO and are not interested in the lower volume. They have a fiduciary responsibility to their own investors. Seems like a Catch-22.
This is where we need a mindset change. Somewhere along the line, the words “smaller” or “boutique” became associated with “risky” in medtech outsourcing. Boutique is not risky. Boutique means intensely client-focused and bringing higher-level specialty capabilities to the table. Think about a boutique hotel experience relative to one of the large hospitality chains. Will the boutique hotel have a pool? Maybe, or maybe not, but from the moment you walk in, you know you are going to be well taken care of.
The remarkably compelling argument here is that boutique CMOs, like ours, will happily apply our warm client experience and special set of skills to assimilate 10% or 20% of a project like the hypothetical presented previously. The boutique CMO does not need the same volume to move the needle for its investors. It is truly the perfect compromise. The cost will be a little higher, but manageable, considering it is a small percentage of the total volume, and the business continuity conundrum is addressed by attaining a viable second source.
In fact, I would go as far as presenting a radical idea—larger OEMs actually consider adding one or two boutique CMOs to their AVL as a requirement to ensure business continuity. Have we seriously learned nothing from the supply chain issues we all had during the pandemic five years ago? The answer to business continuity and mitigating risk is not purchasing excessive inventory levels. As we are all seeing play out in medtech right now, achieving the “right” level of inventory is proving to be a challenge for many organizations.
The solution is to have excellent alternative suppliers that offer a business model that fits the technical, volume, and pricing constraints of a project. My personal experience has been that in some cases, the technical capability of the boutique CMO can be so surprisingly positive that supply chain managers look for other opportunities to move to these vendors. These companies do not present as the “jack of all trades” that would describe many of the larger CMOs in the market, but would be categorized as “an inch wide and a mile deep,” bringing deep technical knowledge and capability to projects that fall within their wheelhouse.
This may be a contrarian point of view to some, but when all aspects are considered, there may not be a better solution for the supply chain manager to mitigate risk and control pricing while strengthening their supply chain by adding specialty capability. Seems like a win-win-win to me.
